Year End Countdown - Time to Plan Your Staff Rewards
It can be tricky to offer traditional end of year cash bonuses in the current economic climate, so how can a share plan help offer an attractive alternative? What plan is right for your business? And why should you start considering engagement now?
Why opt for a share plan?
Employee share schemes and share option plans are a great way of rewarding and motivating any workforce in a variety of business models. The participant gains a sense of ownership in the business and also has a fantastic opportunity to directly influence the financial reward at the end of the journey. In turn, the employer has peace of mind that a long-term incentive programme is now in place, resulting in the safeguarding of key employees through increased loyalty.
There are also significant financial benefits to be found with a share plan. The initial lay out of implementing a share scheme is modest, certainly when compared to the cost (real in terms of recruitment and training costs and also the lost opportunity cost in terms of downtime) of having to replace just one key individual. However, there are noteworthy savings that can be made elsewhere and a cash bonus is a short term and very tax inefficient fix to reward employees, not to mention an unwelcome drain on precious cash.
For example: If you were to pay a bonus to five key employees of £200,000 (£40,000 each) they would individually receive £21,200 (£18,800 PAYE assuming 45% income tax and 2% NIC) and the Company would pay £27,600 NIC (at 13.8%) on the bonus. In total the Company has spent £227,600 for a combined net gain of £84,800.
By way of contrast, if the same 5 key managers are granted an Enterprise Management Incentive (EMI) option over shares, the cash outlay for the company is zero (other than the professional fees to implement the plan). The exact net benefit for employees will depend on the price they are asked to pay to acquire shares, and the price at which they are able to sell, but let's take the following for example (which assumes a market value exercise price):
- Agreed value of shares with HMRC - £40,000
- Sale value of shares - £120,000
- Each of the 5 key managers receives £80,000 gross sale profits. The taxable amount (after deducting £10,900 CGT annual exemption) is £69,400 on which they pay just 10% CGT (assuming Entrepreneurs' Relief applies).
- This results in a net gain of £62,190.
- Plus a Corporation tax deduction when options are exercised.
A combined reward for all the 5 managers after tax of £310,950 with no employer NICs or cash cost (other than fees paid establishing and administering the plan). Just to make things even better, the Company also gets a £400,000 corporation tax deduction at the time the options are exercised based on the difference between £600,000 (combined employee share sale price) and £200,000 (start price).
What share plan is right for my company?
The example above refers to the EMI, but to find out which share plan would be right for your business, why not get in touch!
Why should I consider implementing a share plan now?
The reason for highlighting this now is due to the flurry of demand for our share scheme services at this time of year. Many companies have been considering implementing a plan for some time, but have previously pushed it down the agenda for consideration further down the line. Suddenly the end of year starts to loom and it is necessary to deliver on promises made. A share plan pre-Christmas? Well don't delay as, unfortunately, wait any longer and it may be too late to establish a scheme before the end of the year due to the approvals required internally by the Company's shareholders (and, in most cases, externally by HMRC for share valuations at least).
By acting now, employers should be able to effectively communicate a well-structured share plan to employees before Christmas.
If you would like to arrange a free consultation to discuss implementing a share plan for your company, please contact us directly on 0208 949 5522, or email Kerrie.Willis@rm2.co.uk. To keep up to date with all the latest share plan news, follow us on LinkedIn and Twitter.